Lawsuit filed in Bend aims to stop local governments from pocketing foreclosure equity

'It's a practice that needs to stop,' attorney says

(Update: Adding video, Commissioner Henderson comment, legal counsel statement)

BEND, Ore. (KTVZ) -- Lawyers representing two plaintiffs have filed a class-action lawsuit in Bend they say is aimed at preventing all Oregon counties from unconstitutionally taking more than is owed in delinquent property taxes when they sell foreclosed properties.

Currently, Oregon law allows counties to foreclose a property due to delinquent taxes, sell the property and retain the proceeds, even if it is more than the amount needed to pay the tax bill, the suit claims. That results in homeowner equity, even after the tax debt has been satisfied, being taken by the county governments.

The lawsuit, filed Tuesday in Deschutes County Circuit Court, names every county as defendants and asks that they be enjoined "from further seizing real estate equity" in this manner.

NewsChannel 21 spoke Wednesday with Matthew Hurst of Heffner Hurst, the primary lawyer for the two plaintiffs.

"Its affecting people who have been in these places for 20 to 30 years, and are losing them to the counties over relatively nominal tax bills, relative to the value," Hurst said. "It's a practice that needs to stop."

He continued, “While the counties can sell the homes of people who have fallen behind on their property taxes, after that debt has been satisfied, it is fundamentally unfair and unconstitutional to take the equity as well. This is a form of punishment, and deprives people who just lost their homes of the equity they had built, at the exact time they need it the most.”

Heffner Hurst claims counties are violating civil rights by retaining all the revenue from the sale of the properties after foreclosures, even when it's far in excess of the owed property taxes.

Deschutes County Commissioner Phil Henderson clarified Wednesday that the county doesn't keep all those proceeds -- they are distributed among the local taxing districts in that area.

"Typically what we do with foreclosures, if someone is foreclosed on, if they don't pay property taxes for a number of years, and then they're given warnings and opportunities to correct it -- if they don't, the property becomes ours," Henderson said.

"When it's sold, the money is split between all the various tax districts. It doesn't just go to Deschutes County," he added.

The attorneys who filed suit said many affected property owners may not even realize they have fallen behind on taxes, for a variety of reasons. 

For example, the two plaintiffs they are representing owed less than $4,200 and $2,100 in property liens, and after foreclosure and property sales, the counties profited and retained $84,827.46 and $56,000 respectively. 

One named plaintiff is Tarresa Hutchinson, an Arizona resident whose late mother owned a 50 percent interest in a home site in Bachelor View Estates, east of Bend. The second, Timothy Waterman, is a California resident who bought property in Springfield more than a decade ago and had hoped to eventually build on it.

The lawyer said the two plaintiffs in the case are representative of many more citizens throughout Oregon.

 The suit claims the U.S. and Oregon constitutions state that private property cannot be taken for public use without just compensation. Both prohibit the imposition of excessive fines.

Similar lawsuits have be brought in Arizona, Illinois, Minnesota and Washington D.C., they said.

In 2019, the Oregon Legislature considered rectifying this issue through Oregon House Bill 3175, which did not make it past a first reading.  

The lawsuit notes some states have outlawed or abolished similar seizure practices, while in others, the state supreme courts have held they were unconstitutional. And in other states, they noted, the surplus or "overage" from a tax forfeiture sale is, or can be, refunded to the owner.

Hurst told NewsChannel 21, "We're asking in addition to the property owners that had their equity taken -- and that's not going to be every property that has been foreclosed (upon), there are a lot of them out there -- but we're also asking that the court enjoin this type of practice of keeping the equity above (the owed taxes)."

Amy Heverly, assistant legal counsel for Deschutes County, provided this statement to NewsChannel 21 about the lawsuit:

"Deschutes County, like the other Oregon counties and municipalities, processes tax foreclosures as provided in Oregon statutes (ORS Chapter 312) and distributes proceeds from the sale of foreclosed properties pursuant to Oregon statute (ORS 275.275, specifically).

"According to these statutes, the county is reimbursed for the delinquent taxes and costs associated with the foreclosure, and the excess is distributed to all of the taxing districts (schools, fire districts, road districts, etc.).

"Pursuant to ORS Chapter 312, foreclosure is not initiated until taxes are delinquent for at least three years, and the property owner has two years to redeem the property by paying the delinquent taxes and fees after the foreclosure judgment is entered.

"Deschutes County will defend against the complaint and we anticipate that other counties will for their part as well," Heverly added.